Supreme Court Holds That Severance Payments Are Taxable Wages

In a recent case, the U.S. Supreme Court addressed the issue of whether severance payments made to employees who were involuntarily terminated as part of a Chapter 11 bankruptcy were taxable wages. U.S. v. Quality Stores, Inc.,No. 12-1408 (U.S. Mar. 25, 2014).

In the case, Quality Stores, Inc. paid severance payments to employees and initially withheld taxes required under the Federal Insurance Contributions Act (FICA). Later, believing that the payments should not have been taxed as wages under FICA, Quality Stores sought a refund from the Internal Revenue Service (IRS) on behalf of itself and about 1,850 former employees. After the IRS neither allowed nor denied the refund, Quality Stores initiated proceedings in the Bankruptcy Court, which granted summary judgment in Quality Stores’ favor on the issue. The district court and Sixth Circuit affirmed, concluding that the severance payments were not wages under FICA. However, the Supreme Court reversed, holding that the severance payments were wages subject to FICA tax because they were “remuneration made only to employees in consideration for employment.”

Takeaway: When paying severance to an employee, an employer should give careful consideration to whether the severance payments are taxable wages for purposes of FICA.

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About David Schooler

David A. Schooler is an experienced trial attorney with a proven winning track record in complex employment and business litigation including dozens of first chair jury verdicts. He has been certified as a Civil Trial Specialist by the Minnesota State Bar Association. He is an elected member of the American Board of Trial Advocates and a Fellow of the American Bar Association and has been named a “Super Lawyer” by Minnesota Law & Politics (representing the top 5% of Minnesota Lawyers) for 2010 and 2011. For David's full bio, click here.

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